Hello, I'm Clare and welcome to Smart Investor the show that can help you get the most from your investments.
Please be aware that although we can't offer personal advice we're hoping each episode will provide you with the insight you need to make you a smarter investor.
Funds are a good option for many people looking to invest because your money is pooled with that of other investors and then used to invest in a range of different assets often shares or bonds.
This gives greater diversification than if you were to invest yourself in the shares or bonds of individual companies and it can help reduce the risk you're taking.
However, there are different types of funds.
Some are actively managed, which means a fund manager will choose what to invest in and when to buy and sell.
Others are passively managed which means they mirror a stock market index or basket of assets and the performance follows that of the index they're tracking.
Today we're looking at Exchange Traded Funds - ETFs which are a type of passive investment.
I'm joined by Joe Parkin from BlackRock, the investment firm.
Joe, thanks for joining us.
Can you explain what an ETF is?
An ETF, or Exchange Traded Fund is a simple and easy way to get access to investment markets.
It is a pre-defined basket of bonds, stocks or commodities that we wrap into a fund and then we list onto the exchange so that everyone can use it.
It's a very, very effective way of getting access to a large number of stocks, bonds or commodities in one simple transaction.
They're also pretty new.
What they do is, they allow all investors of all types the ability to invest in global markets without having to do huge amounts of analysis on individual stocks bonds, funds, or potentially go through an advisor.
So there's a large choice.
What can people invest in via an ETF?
ETFs have certainly democratised the way people invest.
It's also given them the ability to invest in countries, regions themes, sectors and all asset classes with one simple transaction.
I think the key to point out is, because it's a passive fund it will only ever track and it will never beat the.
The benchmark is definitely at the core of every single ETF.
This benchmark is pre-defined.
Then what we do is, we then go and track that index.
What you'll get is the performance of the index minus the cost of us running the portfolio.
This differs to an active manager who always tries to beat the benchmark over a period of time but typically charges higher costs in order to do that.
What role can they play in an individual's portfolio?
ETFs can play many roles in an individual's portfolio.
One of the things to realise first up is that ETFs and active funds can co-exist in the same portfolio.
I think actually they work very well in the same portfolio and can complement themselves to build better portfolios.
In terms of the ETF there are three key areas we see individuals using them in their portfolios.
The first is a core holding.
At a relatively low cost, you can get access to global equity or bond markets.
Secondly, they can be used tactically to take advantage of a market event or a political situation.
And finally, they can be used to diversify your portfolio.
Typically, active fund managers are concentrated within their own market or sector.
An ETF provides diversification to that active manager and helps you to build a better portfolio.
So regardless of the investor and their experience an ETF, if somebody is looking to invest, is something worth considering?
ETFs are just another tool investors use to build better portfolios in the same way they use equities, bonds and funds.
Thank you very much for that, Joe.
If you'd like more information about ETFs or other types of funds please visit our website.
Thanks for watching and we'll see you next time.